Taxing highly personalised portfolio bonds for UK residents
What is a PPB?
A Personal Portfolio Bond (PPB) is a life assurance or capital redemption plan that gives the investor freedom to invest in a wide range of assets beyond those described with the PPB legislation, which are as follows:
- Property appropriated by the insurer to an internal linked fund;
- Units in an authorised unit trust;
- Shares in an approved investment trust, or an overseas equivalent;
- Shares in an open-ended investment company (OEIC);
- Cash (but not acquired for speculative purposes);
- Interests in collective investment schemes, which are units in non-UK unit trusts or any other arrangement that creates rights in the nature of co-ownership under the law of a territory outside the UK;
- Shares in a UK Real Estate Investment Trust (REIT) or an overseas equivalent
- An interest in an authorised contractual scheme.
Investing via an offshore plan can bring a number of benefits, not least the ability to access thousands of underlying investments at a discount cost, not having to pay income tax on dividends and interest income arising, nor any capital gains tax when underlying investments are altered or disposed.
What is an offensive asset?
Offensive assets are things which are ‘personal’ to the plan owner, or rather not freely available to anyone else, however, they can also be structured notes, unauthorised investment trusts and equities.
What is a deemed gain?
Essentially, it is an anti-avoidance tax. The legislation can be found in Income Tax, Trading and other income Act (ITTOIA) 2005 Sections 515 to 526.
Where the plan owner is UK resident a deemed gain will be subject to Income Tax.
How is the calculation applied?
The tax charge is not based on actual gains within the plan. Instead, the PPB assumes there is a gain of 15% of the premium and the cumulative gains for each year the plan has been in force.
The tax charge for the PPB will be taxed at the plan owner’s highest rate of tax. It will not be possible to use top slicing relief to reduce the deemed gain.
Example
Harold, a UK resident took out a plan with a single premium of £500,000. He then surrenders the plan in year 6 for £530,000.
If the plan did not hold any offending assets and was never classed as highly personalised, the gain to be assessed for Income Tax would be £30,000 (£530,000 - £500,000).
However, if Harold’s plan held assets that made the plan highly personalised, he would have been assessed for UK Income Tax each year on the deemed gain basis. As a result, the tax charge would be approximately £131,175 by the end of plan year 5.
No deemed gain is applied in the plan year that the plan is fully surrendered.
If Harold had lived in another country when he opened the plan, only moved to the UK in plan year 4 and did not sell the offending assets he held by the end of plan year 4, his plan would become a PPB at the end of the plan year. As such, Harold would be issued with a Chargeable Event Certificate for deemed gain of £114,066. If the offending assets were sold before the plan anniversary, there would be no deemed gains as the plan would not be highly personalised.
What reliefs are available?
Whilst top slicing relief is not available, it may be possible to mitigate some or all of the gain by applying Time Apportionment Relief (TAR).
How will this affect my client?
In keeping with our product terms and conditions, we do not permit UK resident plan owner(s) to continue to hold highly personalised plans. This does not mean that the plan needs to be surrendered, but offending assets must be sold as soon as possible. Once resident in the UK, any offending assets must be sold by the end of the current plan year to avoid it becoming a PPB.
How is a chargeable gain declared for UK income tax purposes?
Gains on foreign plans should be inserted into the ‘Foreign’ pages of the tax return referenced as ‘SA106’.
HMRC help sheet HS321 (Gains on foreign life insurance plans) provides further information and guidance for completing UK tax returns.
Calculation
| Plan year (y) | Premiums paid, years 1 to end year (A) | Cumulative amount of PPB excesses for year 1 to (y-1) (B) | Aggregate part surrender gains for years 1 to (y-1) (C) | PPB gain for year y=15% (A+B-C) |
|---|---|---|---|---|
| 1 | £500,000 | Nil | Nil | £75,000 |
| 2 | £500,000 | £75,000 | Nil | £86,250 |
| 3 | £500,000 | £161,250 | Nil | £99,188 |
| 4 | £500,000 | £260,438 | Nil | £114,066 |
| 5 | £500,000 | £374,503 | Nil | £131,175 |
| 6 | £500,000 | £505,679 | Nil | No Gain |
| Total deemed gains: | £505,679 |
Important notes
For financial advisers only. Not to be distributed to, nor relied on by retail clients.
This information is to be used by financial advisers only. RL360 accept no liability for any action taken or not taken by an individual or a firm as a result of the contents of this material. The tax treatments and information contained in this document are based on our understanding of current tax law and HMRC practice as at May 2019 and may be subject to change in the future.
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